WATTERS v. WACHOVIA BANK

Print this transcript Transcript: 

Argument of E. John Blanchard

Chief Justice Roberts: We'll hear argument next in 05-1342, Watters v. Wachovia Bank.

Mr. Blanchard.

Mr. Blanchard: Mr. Chief Justice, and may it please the Court:

The dual banking system of State and Federal regulation in our nation which we've enjoyed for over 140 years is one of the finest examples of cooperative federalism in our history.

For 35 years, the States, not the OCC, have prudently exercised their authority over non-bank State-chartered operating local subsidiaries of national banks.

Indeed, respondent Wachovia Mortgage complied with Michigan law for 6 years until in 2003 there was a corporate reshuffling and now it claims it's exempt from the same Michigan laws it complied with.

The OCC through its Regulation 7.40006 has disrupted the careful balance and seeks to deprive the States of the regulatory authority that they have historically exercised.

Justice Ginsburg: If the national bank set up its mortgage operations as a division or as a department, then the sole regulator would be OCC, right?

Mr. Blanchard: That's correct, Your Honor.

But Wachovia Bank and Wachovia Mortgage made a choice.

They made a business judgment to create a State-chartered operating subsidiary.

Chief Justice Roberts: Why did they do that?

What's the advantage to them having that subsidiary rather than doing this directly?

Mr. Blanchard: Your Honor, the advantage is that Wachovia Bank insulates itself from liability, because it's a bedrock principle of state corporate law that the parent corporation is not liable for the acts of the subsidiary corporation.

Chief Justice Roberts: So mortgage subsidiary could possibly get into some trouble that the bank wants to protect itself from and not have... they have a certain number of assets that are subject to liability in the subsidiary, but they would... otherwise they'd expose the whole bank to those liabilities?

Mr. Blanchard: Absolutely, Your Honor.

From... the conception behind operating subsidiaries was to separate a certain part of the business and the attendant risks of that business also to separate.

Justice Scalia: Well, I assume that the Federal regulating authorities require a certain ratio of loans to real estate value, things of that sort.

And I assume that the States may have different rules with regard to that; right?

In other words, the oversight might be different.

The States may be more permissive as to certain loans or as to, you know, what the balance sheet of the bank has to look like than the Federal Government is.

And if you have a State subsidiary that is overseen by state authorities, you might have a different result.

Mr. Blanchard: Possibly, but--

Justice Scalia: Well, if not I don't see any advantage in this great Federal banking system you're talking about, if it's Tweedledum and Tweedledee.

Mr. Blanchard: --Well, the States do not... exclusive visitorial powers over national banks rest with the OCC.

But Wachovia Bank and Wachovia Mortgage are separate and distinct.

Chief Justice Roberts: You're not seeking visit... "visitorial", is that the word?

Mr. Blanchard: Correct.

Chief Justice Roberts: You're not seeking visitorial rights with respect to the parent bank.

Mr. Blanchard: Absolutely not.

Chief Justice Roberts: You're not arguing that because you need to see more about the mortgage--

subsidiary you need to see what the parent is up to?

Mr. Blanchard: No.

Chief Justice Roberts: Okay.

Mr. Blanchard: No, we're not.

Michigan and the States want to be able to help their citizens with abusive and predatory lending complaints.

Justice Breyer: Suppose that it was a national bank.

Forget the subsidiary.

And your State says: Well, we want to have a law here that says we want to send our own bank examiners in.

And moreover, we don't want them to make any loans in excess of 12 percent interest.

Fine.

Would that be constitutional?

I mean, wouldn't be preempted?

Mr. Blanchard: As to the national bank?

Justice Breyer: Yes.

Mr. Blanchard: Yes.

Justice Breyer: Yes, of course, because it conflicts and they don't want it.

Mr. Blanchard: Yes.

Justice Breyer: All right.

Do they have the authority to say a subsidiary is a national bank?

Mr. Blanchard: No.

Justice Breyer: No, they can't?

Where is it in the law that says they don't have the authority to say that a subsidiary of a national bank owned by a national bank is a national bank?

Is there something specifically that stops them from saying that?

Mr. Blanchard: Yes.

Justice Breyer: What?

Mr. Blanchard: The Gold Foods case, the--

Justice Breyer: What is it?

What is it... I mean, what statute or what is it that prevents them from saying it?

I don't know the Gold Foods case.

Mr. Blanchard: --Well, the point is that the corporate law recognizes the two as separate and distinct corporate entities.

Justice Scalia: I thought your point was that the statute defines national bank, but also defines affiliates, and refers to them as two separate entities.

Mr. Blanchard: Yes, Your Honor.

Justice Scalia: And I thought your point was that the effect of this regulation is to simply eliminate that distinction?

Mr. Blanchard: You're right.

Chief Justice Roberts: Their argument, they haven't argued... I realize this was a hypothetical, but they haven't argued that the subsidiary should be treated as a national bank.

They're arguing that they're entitled to say that the same preemption that applies to the national bank applies to the subsidiaries.

Mr. Blanchard: Exactly.

That's what they--

Chief Justice Roberts: Presumably, if they said it's treated as a national bank they would lose the benefit of the separate corporate existence when it came to issues of liability.

If they said this subsidiary is a national bank, then presumably the separate corporate existence they're seeking to take advantage of would be obliterated.

Mr. Blanchard: --Well, but that's the... they are trying to contend that they are one and the same.

But they can't have their cake and eat it, too.

Justice Kennedy: Well, I guess we can ask the respondents.

But is it your understanding that respondents take the position that the State has no control at all over whether or not the shares have been properly issued, whether or not certain accounting requirements applicable to all corporations have been complied with?

Mr. Blanchard: Yes, that is my understanding of their position.

Justice Kennedy: They say that there's no area of State law that is applicable to the subsidiary corporation?

Mr. Blanchard: They are saying that visitorial powers over the State-chartered operating subs is exclusively--

Justice Kennedy: I could understand that with reference to just the amount of consumer loans, as Justice Scalia was talking about.

But just to see if the corporation has a... had... had a meeting that year, has duly elected its officers under State law, do the respondents take the position you have no authority to visit the corporation to determine that?

Mr. Blanchard: --They take the authority... the position that Michigan has no authority to impose on the State-chartered operating sub the two Michigan laws--

Justice Ginsburg: But let's... there are two different kinds of regulations.

I think Justice Kennedy was talking about regulations of a chartering State.

This subsidiary was set up under the law of a State.

It wasn't Michigan.

Is there... is anyone contesting that... was it North Carolina?

Mr. Blanchard: --Yes, you're correct.

Justice Ginsburg: --that they have to meet all the requirements for setting up a corporation and having meetings and all that that North Carolina requires of corporations that are incorporated in that State?

Mr. Blanchard: No, I've not heard them say that as to North Carolina law.

But what they're saying is that the Michigan Mortgage Broker, Lenders and Servicers Licensing Act and the Michigan Secondary Mortgage Act do not apply to them.

Justice Kennedy: Well, that seems to be a standard preemption case.

It's not as broad as just visitorial powers generally.

Maybe I'm wrong.

Do some subsidiaries of the... of a national bank do things other than banking, say title insurance or something like that?

I don't see anything in the record where the OCC wants to displace the State as to that.

This is just a standard preemption case.

When the OCC has regulations that control, then the State has no authority to add to those regulations or to have, or to have contrary regulations.

But if it's something that doesn't have to do with banking at all, then I suppose they would say... I can ask them... I suppose they say the State has authority to regulate.

Mr. Blanchard: The important point, though, Your Honor, is that the OCC has no independent power to preempt the validly enacted legislation of a sovereign State.

Justice Breyer: Doesn't it have exactly the same power that any other agency or Congress has?

That it has the power, if its regulation is authorized, it has the power to what they say, preempt a state law that obstructs, impairs, or conditions a bank's ability fully to exercise its federally authorized real estate lending powers?

That's what they say, and then they list some examples.

Suppose they said nothing.

Wouldn't we be in the same boat?

After all, a state cannot under the Federal Constitution normally enact a law that interferes or stands as an obstacle to the achievement of the objective of the Federal law.

So if that's right, or if it's wrong, explain why it's wrong, but if it's right, why don't you tell me whether the two laws that you are worried about do or do not stand as an obstacle to the full achievement of the purposes of the statute as implemented by their regulation?

Mr. Blanchard: They do not.

First of all, if the OCC... if Congress intends to alter the balance that I spoke of earlier, it must do so with clear and manifest language.

There must be unmistakably clear language that Congress intended to authorize the OCC to preempt the state law.

Justice Breyer: Let's assume I don't agree with you about that, that I think conflict preemption does not require clear language.

Assume that, even though you disagree with it.

Now on my assumption that you can have the law if it doesn't conflict, but you can't have the law if it does conflict, so now you explain to me why the two laws at issue here don't conflict.

Mr. Blanchard: Your Honor, in the Barnett case and in the Atherton case, in order to have the kind of problem you're talking about, there must be a significant interference with the business of banking or an incapacitation of the business of banking.

Our Michigan law doesn't incapacitate what--

Justice Ginsburg: Mr. Blanchard, may I ask you a question, perhaps preliminary to what you are launching into?

My understanding was that you did not question the OCC's regulatory authority over a unit that it says can do what the national bank itself could do in the real estate business, no more, no less.

OCC regulation, visitation, all the rest, OCC's regulations validly applied to this subsidiary that has been set up in North Carolina and is operating in Michigan; is that right?

It is one thing for you to say we have the authority to regulate.

Are you saying at the same time that OCC is out of the picture because its dual regulation conflicts with the inevitable?

Mr. Blanchard: --I am not saying that.

What I am saying is the OCC does not have the exclusive right.

Justice Ginsburg: Ah, you're saying, you started to say they can't have their cake and eat it too, but you're saying they can have the worst of all possible regulatory worlds, so that they've got two equally competent regulators, and they have to meet the requirements of both?

Mr. Blanchard: Yes.

I am saying that--

Chief Justice Roberts: And if they don't want to, they don't have to set up a separate subsidiary, right?

They can do this business directly as a national bank and they're not going to be subject to any visitation?

Mr. Blanchard: --You are absolutely correct.

As I started to say earlier, they made that choice and they came to Michigan, and they obtained a certificate of authority from the Michigan Corporations Division as a foreign for-profit corporation doing business in the state.

Chief Justice Roberts: Right.

And I would have thought your answer to Justice Breyer was yes, that they get to regulate to the extent they want to, and the state does, and if there's a conflict, the federal regulation will prevail, but what's the problem here is that they're issuing a categorical regulation saying the state can't regulate at all.

Mr. Blanchard: Yes.

They are claiming exclusive preemptive authority.

Justice Scalia: I didn't understand that you made this--

Justice Stevens: May I just finish, please?

You argued, as I understand it, correctly, that the state does, exercises certain regulatory controls that will not be exercised... will not be replaced by federal controls; is that right?

In other words, you... that they will be unregulated to a certain extent?

There will be less regulation under the federal sovereign than there is under the state; is that correct?

Mr. Blanchard: You are correct, Your Honor, in that Wachovia Mortgage as a subsidiary of a national bank is a registrant under Michigan law.

And as a registrant, it is not subject to an annual--

Justice Stevens: Can you give me some specific examples of what Michigan would require that the OCC does not require?

You mentioned licensing, for example.

Mr. Blanchard: --Michigan would require Wachovia Mortgage to register.

There's a difference between registration and licensure.

As a subsidiary of Wachovia Bank, they are a registrant like they've been for the last--

Justice Stevens: Does that have any impact on the way they run their business?

Mr. Blanchard: --No.

Justice Stevens: I mean, does it make any difference as a matter of what they have to do in order to comply with the law that they are now exempt from Michigan rules and subject to Federal rules instead?

Mr. Blanchard: No.

Michigan just wants to be able to... and the other states... to deal with fraud and deceit and material misrepresentation in mortgage transactions, and to have a say over the corporations that come to their state and do business.

Justice Scalia: --Mr. Blanchard, if I could go back to what you were saying before this last line of questioning, I didn't understand your position to be that the OCC can come in and regulate this non-Federal bank up to the point where its... well, can do it apparently without limitation.

And where its regulation conflicts with the state regulation, the Federal prevails.

Mr. Blanchard: Or the more restrictive.

Justice Scalia: Ah, or the more restrictive.

Mr. Blanchard: That's the difference.

Justice Scalia: The Federal Government says you can have outstanding loans of $10 billion and the state says no, you can have outstanding loans of 8 billion.

Mr. Blanchard: No, Your Honor, the--

Justice Scalia: Wait.

What happens in that situation?

Mr. Blanchard: --Well, it doesn't happen in Michigan because--

Justice Scalia: Well, invent some other hypothetical then.

I'm talking about a situation in which the Federal law is more permissive than the state law.

Which law prevails?

The Federal law allows this bank to do things which the state law would not allow it to do.

As I understood your prior answer, you say oh, of course, if the Federal law allows to it do things the state law doesn't allow to it do, the Federal law prevails.

I didn't understand that to be your position.

And if it is your position, I don't know what all this fuss is about.

That's the end of the game, isn't it?

Mr. Blanchard: --No, Your Honor.

You see, in... we do not conduct... they are exempt from an examination where we go in and look yearly at such things as capital assets management, earnings, liquidity.

Those aren't the kinds of things that we're talking about.

They, as a registrant, they are exempt from that, from an annual examination.

They're not incapacitated, nor are--

Justice Scalia: Exempt from state examination?

Mr. Blanchard: --Yes.

The state chartered corporation, Wachovia Mortgage, is exempt under Michigan law from an annual examination.

Justice Breyer: We're not looking for that.

We're looking for the opposite.

As I read this, the banking agency has not said, we wipe out all of your laws.

They've said, we wipe out a subset of laws, which are defined as those laws that obstruct, impair, or limit the ability of this bank to fulfill its federally mandated powers.

Okay?

So they're just saying, we only get the ones that are in conflict.

Now, they then have a list of which ones they preempt and which ones they don't.

So my question to you is, give me a list here of which ones they think conflict that you think don't.

Mr. Blanchard: They... their position is that both laws that we append to our brief, both laws in their entirety, are preempted.

Chief Justice Roberts: Their position is not that it only preempts in cases of conflict.

Under 12c apart, 7.4006, it says, state laws apply to national bank operated subsidiaries, which is what we're dealing with here, to the same extent that those laws apply to the parent national bank, which is to say not at all.

Mr. Blanchard: Correct.

Chief Justice Roberts: So it's not a case of conflict preemption.

They're trying to preempt state law whether it conflicts or not, right?

Mr. Blanchard: That's correct, Your Honor.

Justice Ginsburg: You do have... one thing that seems concrete and clear to me... correct me if I get this wrong... Michigan is kind of deferring to OCC in its primary jurisdiction sense.

It says customers, if you've got complaints about what this operating subsidiary is doing, you go first to the OCC; and then if we think... we, Michigan... thinks OCC has not given you an adequate response to your complaint, we take over.

Mr. Blanchard: You are exactly correct.

That's the Michigan regulatory--

Justice Ginsburg: So it's kind of a reverse supremacy.

Where it's usually the feds that have the last word, but here you're saying Michigan has decided that it will let OCC go first and Michigan will be kind of a supervisor for the adequacy of the OCC's handling of the consumer's complaint?

Mr. Blanchard: --Yes, you are exactly correct.

Our regulatory framework in Michigan says that the complaint is referred to the appropriate Federal agency, and only if that complaint is not being adequately pursued does the commissioner have that window of investigative authority for her to pursue it.

It is a cooperative type of statute.

Justice Ginsburg: Do you know another arrangement where the Federal agency goes first but then the state agency has authority to say Federal agency, you didn't deal with this consumer adequately, so we will take over?

I know schemes that work the other way where the state goes first, and then the Federal authority, but do you know another one?

Mr. Blanchard: Another one that--

Justice Ginsburg: Where the primary adjudicator, decision-maker would be the Federal authority, but then the state can override that if it thinks the Federal authority hasn't done an adequate job?

Mr. Blanchard: --Well, in a sense, in our statute, the commissioner of the state agency is able to investigate if the complaint referred to the comptroller has not been adequately--

Justice Scalia: That's not the question.

Justice Ginsburg is trying to find out if you know any other situation where when the Federal agency doesn't do an adequate job, the state agency comes in?

Mr. Blanchard: --No situations come directly to mind.

Justice Scalia: Maybe civil rights actions where there's a Federal agency that has some remedial powers and if the Federal agency doesn't act, the citizen is free to bring litigation in state court?

I guess that would be--

Chief Justice Roberts: Or environmental regulation where just because the Federal EPA doesn't take a particular action against a polluter, doesn't mean that the state can't take action against the polluter.

Mr. Blanchard: Yes, Your Honor.

Justice Ginsburg: Isn't the action an inadequate action?

Michigan is saying yeah, the Federal authority can do with respect to this unit just what it would do to a national bank itself, but if we think that is inadequate, that is a question of just one act or the other, but if the... it is the state judging the--

adequacy of a particular Federal response.

Mr. Blanchard: Yes.

Chief Justice Roberts: So if the Federal--

U.S. Attorney prosecutes, decides to prosecute someone for manslaughter, the state can decide that's not an adequate enough response and prosecute them for murder, right?

Mr. Blanchard: Yes, Your Honor.

Justice Alito: Could the OCC--

Justice Scalia: --Did this go through your... can I just ask--

Justice Alito: --Sure.

Justice Scalia: --This still goes to the same thing.

Does Michigan do this by grace?

If Michigan wanted to, could it just tell the feds to butt out and say, you know, all these years we've been letting you come in first, and we only step in when we think you haven't done a good job, but we've had it.

[Laughter]

Especially after this lawsuit, get out, we're going to regulate our state banks?

Mr. Blanchard: No, Your Honor.

That would be contrary to the express statutory scheme in Michigan.

Justice Scalia: I know in Michigan.

I'm saying, could Michigan change its statutory scheme to kick the Feds out?

Or would that be prevented by this Federal statute we're discussing here?

I'm trying to see what you think this Federal statute does.

Or what the--

Mr. Blanchard: The Federal rule provides that the operating... the State chartered operating subs are to be treated just like the law pertaining to the parent national bank.

And there is no authority from Congress given to the OCC that kind of rule.

The OCC only has the authority that Congress gives it, either through a preemptive statute or through the dell designation of preemptive authority; and Congress has not given them that kind of power.

Justice Souter: Let me ask the question... the regulatory question.

You do not dispute Michigan does not dispute that the operating... well, strike that.

Michigan does not dispute that national banks can go into business of real estate loans?

And Michigan does not dispute that Congress has authorized national banks to operate through subsidiaries for specific purposes like this.

My question is can you give me any plausible reason to think that Congress would have contemplated this system of potentially more restrictive State legislation when its national bank in a given instance decides to do... to exercise its Federal banking power through a subsidiary rather than directly?

Can you think of any reason that Congress would have contemplated the scheme that you're, that you're defending?

Mr. Blanchard: Well, first of all, Your Honor, I'm not defending that Michigan has a more restrictive scheme or that Michigan law in any way incapacitates or significantly interferes with the business of banking.

Justice Souter: Well, if, if... if the banks have got, let's say, a subsidiary has to go through two rounds of bank inspection every year instead of one round, it is going to cost them something.

Regulation costs the regulated entity something.

It is a burden on them.

And we also have to assume that there may be instances... you brought it up... in, in which the, the... the State burden is heavier.

So with those possibilities in mind, can you think of any reason why Congress in authorizing the exercise of the Federal banking power through a subsidiary would have contemplated Michigan or any State would have this authority?

It seems counterintuitive to me.

They're saying you can... you can... you banks can exercise the Federal banking power through a subsidiary.

It would seem strange to me that Congress would silently say,

"and, of course, we acquiesce to a... a dual system of regulation that would not apply to the bank itself. "

What reason would Congress have had for assuming that might be the result?

Mr. Blanchard: A recognition that the States have a sovereign, compelling and legitimate interest in regulating those corporations that it charters and that do business within its borders.

And... and that that balance should be respected.

Justice Souter: So it is state sovereign immunity in effect, is the answer... State sovereignty is rather the answer?

Mr. Blanchard: But the... but the key point, and I would like to reserve whatever time I may have.

Chief Justice Roberts: You better hurry then.

Mr. Blanchard: The key, the key point is that Congress has distinguished clearly and unequivocally between affiliates and national banks; but it has not included affiliates in either Section 481 or 484 of the National Bank Act.

National banks are not synonymous or equivalent to the State-chartered operating subsidiaries.

Unknown Speaker: Thank you, Mr. Blanchard.

Mr. Long?

Argument of Robert A. Long, Jr.

Mr. Long: Mr. Chief Justice, and may it please the Court.

I would like to start with the question that Justice Souter asked because there are some important principles that are really not disputed in this case, and I think they help to focus the issue that is before the Court.

There is no dispute, as we understand it, that mortgage lending by national banks is supervised exclusively by the Comptroller of the Currency.

And there is also no dispute that national banks' incidental powers under Section 247 include the power to make mortgage loans through a operating subsidiary.

And an additional point is that both Federal statutes and Federal regulations state that when national banks make mortgage loans or exercise their banking powers through subsidiaries they do so subject to the same terms and conditions that apply to the exercise of the power by the national--

Justice Stevens: Mr. Blanchard, may I ask you a question.

I just want to understand.

Wachovia has branch banks all over the country.

Are they generally subsidiaries or are they divisions of the bank?

Mr. Long: --Well, a branch of a national bank has a particular status under Section 36 of the National Bank Act.

Justice Stevens: I understand that.

I'm asking a factual question.

Mr. Long: It would not be separately incorporated.

So--

Justice Stevens: They are actually divisions, in effect, of the national bank itself?

Mr. Long: --Well, I think they are generally referred to as branches but I think its would be more a division.

That would be--

Justice Stevens: At least they are not separate corporate subsidiaries.

Mr. Long: --That... that--

Justice Stevens: Why is that, that the Best bank decided to use the subsidiary approach for this business, rather than the more traditional banking approach.

Mr. Long: --Well, of course, anything that a bank does through an operating subsidiary it could do through the bank.

It can always do it through the bank.

But there are many reasons why a bank may choose an operating subsidiary.

They can be managerial reasons; it's... just sometimes works better as matter of business management.

Justice Stevens: It protects from liability, too.

Mr. Long: Well, that is one of the reasons.

Although--

Justice Stevens: --in the district.

Mr. Long: --I will say, Justice Stevens, I have not been able to find examples of national bank operating subsidiaries that have become insolvent.

They are regulated very heavily by the Comptroller and so they don't.

Chief Justice Roberts: But you have a subsidiary that's in the mortgage lending business that presumably competes with other companies in the mortgage lending business that are not associated with national banks, and you're claiming an immunity from the regulation that their competitors are subject to.

Is that right?

Mr. Long: Well, but again, Mr. Chief Justice, the national banks compete.

And its undisputed--

Chief Justice Roberts: And that's fine, and they have an express provision in 48... 484(a) that says they're, they're exempt from regulation.

The question is whether a separate subsidiary that is not a national bank that competes with other mortgage lending companies is immune from the regulation that those other companies--

Mr. Long: --But again, Mr. Chief Justice, thrifts, S&Ls, State-Chartered banks in all 50 States are permitted to have operating subsidiaries.

It's recognized not just for national banks, but really for all types of banking institutions, that are operating subsidiaries are a useful tool of banking.

This is not a sort of special privilege that's given--

Chief Justice Roberts: --Justice Breyer's questions were pointing out, to the extent your regulation... the Federal regulation of your subsidiary conflicts with the State law, that regulation is going to prevail.

The question is whether or not you are immune from State regulation across the board--

Mr. Long: --Well, and you asked that question.

I mean, I think it might be useful to think first about national banks and then about the operating subsidiaries.

It is not true that there are no State laws that apply to national banks.

This Court's unanimous Barnett Bank decision is the clearest statement of the principle.

Any State laws that prevent or significantly impair or impede the exercise of national banking powers are preempted.

But many State laws having to do with contracts--

Justice Alito: In real world terms, what's involved here?

What are examples of some of the things that Michigan does or some other State does that impair or impede the operations to the--

Mr. Long: --The beginning is, it is a complete separate set of regulation.

You have to register or obtain a license.

You have to submit to examination by the regulator.

Investigation.

Enforcement.

There are substantive laws; Michigan has some that are not directly at issue in this case--

Chief Justice Roberts: --One of those laws might be, I mean, let's say they have a law, when you're issuing a mortgage to a consumer, you have to give them a disclosure about how much they're going to end up paying over the life of the loan and all that.

And they require that of anybody who issues a mortgage in Michigan.

Could that law be applied to your subsidiary?

Mr. Long: --Well, the question, Mr. Chief Justice, would be is it preempted as to the national bank?

The Comptroller of the Currency would say yes.

But the issue in this case is if it is preempted as to the national bank, then it is also preempted when the national bank chooses to exercise this power that it has under Section 24--

Chief Justice Roberts: Isn't... isn't your friend correct then?

You are really trying to have your cake and eat it, too.

You're saying if we did this without a subsidiary, we wouldn't be subject to that.

But you want to be able to operate through a subsidiary and yet not be subject to the same rules that apply to other people.

Mr. Long: --Well, but it, it with respect, it is not really a case of having our cake and eating it, too.

We are in the area of powers of national banks.

And the Court has recognized for a century that in that area, when national banks have powers, including incidental powers recognized by the Comptroller, they generally preempt any State law that prevents or significantly interferes--

Justice Breyer: That's the question I had.

I got somewhat thrown by the Chief Justice's question, because I thought first, when I read the reg, 34.4.ab, that those things that are preempted are those things that obstruct, impair or condition, or in other words limit, the Federal powers of a national bank.

Mr. Long: --That, that is correct.

Justice Breyer: But I thought we were basically dealing with conflict--

Mr. Long: Yes.

Justice Breyer: --not fielding.

Mr. Long: It's... that's one level--

Justice Breyer: But... but the last part of the reg says that what applies, no State law applies to a national bank operating subsidiary if it doesn't apply to the parent bank.

And I began to think it fields preemption.

Am I right in thinking that it is conflict preemption, not field, because it is conflict in the case of a national bank?

Mr. Long: --Well... it's, it's a very important point.

And our position is there are actually several ways in which you could analyze this case and arrive at the conclusion that the Comptroller's regulations are valid.

One is looking simply at statutory language and saying we would, we the Court would reach this result as we did in the Franklin National Bank case even without any regulation.

And second of all is to say the regulations are a reasonable interpretation of the statute.

A third is to say that the Comptroller has broad rulemaking authority.

And as this Court recognized in De La Cuesta and many other cases, an agency exercising its rulemaking authority can preempt State laws even though the statute itself would not--

Justice Scalia: I think, the question is not whether it can preempt State laws but whether the rulemaking authority can, can eliminate a, a basic division of the statute into a national bank and affiliates of the national bank.

The statute makes a clear distinction between the two.

And the effect of what, of what the agency has to done here is simply to eliminate that distinction, and to say really it doesn't matter.

Mr. Long: --No.

It... I--

Justice Scalia: If you are an affiliate of a national bank, you have the same immunity that the national bank has.

That's not what the statute says.

Mr. Long: --I have a two-part answer to that question, Justice Scalia.

One is that Section 484 of the section you're referring to does limit the visitorial authority as to national banks, but it is silent as to operating subsidiaries or any other type of affiliate.

States do exercise visitorial authority over some affiliates of national banks.

That's established.

Operating subsidiaries are a special type of affiliate; 484, which was enacted during the Civil War, a hundred years before operating subsidiaries were authorized, really doesn't address the question of visitorial authority.

Justice Scalia: I mean, an operating subsidiary is an affiliate, right?

What kind of affiliates did they have before they had operating subsidiaries?

Did they rent pool halls, or what?

Mr. Long: It's a type of affiliate--

Justice Scalia: I would have thought that any affiliate of a national bank would, would be engaged in essentially banking business.

Mr. Long: --But, but this really became clear, in answer to your question, in part two of my answer.

In 1999 when Congress enacted the Gramm-Leach-Bliley Act, it directly addressed this question of affiliates of national banks.

And this is on page 2A of our appendix.

It refers to, it created a new type of affiliate, for the first time, financial subsidiaries which can do anything financial in nature.

So they can actually engage in activities that the parent national bank could not.

But if you look at the bottom of page 2A of our appendix, this is Section 24A now of the act, it said that financial subsidiaries can also engage in activities that are permitted for national banks to engage in directly, subject to the same terms and conditions that govern the conduct of the activities by a national bank.

And then at the bottom of 3A and going over to 4A where they actually define financial subsidiaries, they do so by distinguishing them from the operating subsidiaries which had existed for decades.

And at the top of 4A you see that the operating subsidiary again engages only in activities that the national banks may engage in directly and are conducted subject to the same terms and conditions.

Then if you'll bear with me a moment longer, on page 12A of our appendix some additional provisions of GLBA... actually, that's the Gramm-Leach-Bliley Act, GLBA people call it... said... this is on 12A... that securities activities and insurance activities, activities that have been traditionally subject to State regulation, if they're engaged in by a functionally regulated subsidiary, operating subsidiary or a financial subsidiary, then they may be regulated by relevant State securities authorities or State insurance authorities.

So Congress was actually quite specific.

I mean, your question is about statutory language.

You don't find this in 484, which is, since it's a century old, doesn't really get into this.

But in this 1999 statute, it's all about subsidiaries of national banks.

Congress was pretty clear if it's securities, if it's insurance, it can be regulated by States.

They were specific about that.

If it's a banking activity that the bank itself can undertake, it's subject to the same terms and conditions.

And so, going back to the Chief Justice's question, you have this question of would it be a preempted State preempted state law if it were applied to the national bank when the national bank is making a mortgage loan.

Not every State law is preempted because not every State law conflicts.

But if it does--

Chief Justice Roberts: What authority do you have for the proposition that when then Federal law says subject to the same terms and conditions that they're referring To State regulation as opposed to the same Federal regulation that applies to the national banks?

Mr. Long: --Well, I mean, we have section 7.4006, which is the 0CC's regulation interpreting that language in the statute and in its own OPSUB regulations, section 5.34.

And we also relied simply on the ordinary meaning of "terms and conditions".

It means prerequisites, limitations.

Chief Justice Roberts: Was 7.4006 issued pursuant to... what did you call it, GLBA?

Mr. Long: GLBA?

Chief Justice Roberts: Yes.

Or did it predate that?

Mr. Long: 7.4006 was issued pursuant to 24-7, which is this incidental powers provision, and 24(a), which I've just been walking you through, which is a provision of GLBA.

So it is based partly upon GLBA, and it is an interpretation of the same terms and conditions language.

Justice Breyer: Conflict preemption basically strikes down a State law that stands as an obstacle to the full enforcement of the Federal law.

Mr. Long: Yes.

Justice Breyer: All right.

Now, with that in mind, suppose that you didn't have either 7.4006 or 34.4(a)(B).

Neither existed.

But we listened to what the agency said as a Court and they explained how the regulation worked.

Would you expect to come to precisely the same result?

Mr. Long: Well, I mean, of course--

Justice Breyer: Would you or not?

Mr. Long: --We do have them and we think that makes the case easier, of course.

Justice Breyer: I know, but would you... would you expect to come to the same result or not?

Mr. Long: Yes.

We would say that if you start with 24-7 and the incidental powers of national banks and the undisputed point that one of those incidental powers is for the national bank--

Chief Justice Roberts: How does it conflict with Federal banking authority for the State to audit the books of the mortgage subsidiary?

Mr. Long: --Well, it has been established since the beginning of the national banking system that... and this goes back to the history of the first and second Bank of the United States in McCullough against Maryland... that the national banking system is protected from possibly unfriendly State legislation.

Chief Justice Roberts: Take my earlier case about the consumer disclosure.

Michigan has a law, I assume, that any mortgage lender has to tell the consumer all this information.

Would that conflict with the authority of a national bank?

Mr. Long: The Comptroller's view as I understand it is that it would.

But again let me emphasize--

Unknown Speaker: How?

Mr. Long: --Because--

Chief Justice Roberts: So you think any regulation would conflict with the national bank status?

Mr. Long: --Well, I think that may go too far.

But I think what Comptroller has done, it has... has been to look at a series of these State regulations and determine whether in fact they do impair or impede the exercise--

Unknown Speaker: I'm trying to get a handle on it.

As I understood the case that came, I don't think there's disagreement on either side about how conflict preemption works.

But I thought your position was that more is involved here and that the State can't regulate it at all, and you're not getting into a conflict preemption question.

It's just if it's a State regulation it can't--

Mr. Long: --I think our position is there are multiple roots that we can win this case.

One is based on conflict preemption.

Another--

Justice Stevens: But you do take a field preemption position, don't you?

Mr. Long: --Yes, of course.

And another route is simply that the agency has--

Justice Stevens: I mean, it's truly broader than just conflict preemption.

Mr. Long: --Yes.

Justice Stevens: Literally.

Mr. Long: Yes.

And the agency has broad rulemaking power.

It's exercised it here.

There's really no dispute about what the OCC's rules mean.

The only question is whether they're valid and then what is--

Justice Kennedy: What's your best case for the proposition that an agency and not the Congress defines the extent of field preemption?

Mr. Long: --That an agency and not the... certainly the Delaquesta line of cases stand for the proposition that if an agency has preempted State law by regulation, the questions are simply whether the agency has acted within the scope of its delegated authority and whether it is a reasonable accommodation of the conflicting principles and whether there's any reason to think that Congress would have disagreed with it.

Are there... I mean, there are examples.

For example, in the world of Federal thrifts OTS has a sort of field preemption as I understand it.

It's evolved differently in the world of national banks.

That's conflict preemption.

Justice Scalia: What is a functionally regulated subsidiary of a depository institution.

Mr. Long: Well, that that again goes to this scheme of GLBA that I was trying to describe.

The notion that Congress had is that you're going to regulate by function.

So if it's insurance, the State can regulate it whether it's in the subsidiary or in the bank.

If it's securities, the SEC and in some circumstances the States can regulate it.

But if it's core banking functions like mortgage lending, that's going to be regulated subject to the same terms and conditions that apply when the bank itself conducts those activities.

Justice Scalia: And is that a functionally regulated subsidiary?

Mr. Long: Yes.

Justice Scalia: If it's just engaging in banking activities?

Mr. Long: That is the concept as I understand it.

It's going by function and we think that shows actually Congress did--

Justice Stevens: Does Wachovia have any branch banks in Michigan?

Mr. Long: --Wachovia does not, although... I mean, an interesting feature of the Michigan law is if they did Michigan's law would not apply, which we think is not consistent with their view that the OCC is an inadequate regulator, because it would be exactly the same whether or not there's a branch.

Justice Stevens: Are there States in which Wachovia has both branch banks and subsidiaries comparable to this?

Mr. Long: Yes, yes.

North Carolina and others.

I will add, there was a point at the beginning that this Wachovia Mortgage Company actually was regulated by Michigan for 6 years and there were no problems.

During that period it was a subsidiary of a bank holding company, and that's a completely different situation.

Those are not regulated at all by the OCC.

So of course they were regulated by Michigan.

That's the way subsidiaries of bank holding companies are regulated.

That's simply a different situation.

If there are no further questions, I will--

Argument of Sri Srinivasan

Chief Justice Roberts: Thank you, Mr. Long.

Mr. Srinivasan.

Mr. Srinivasan: Thank you, Mr. Chief Justice, and may it please the Court:

Let me begin by addressing this question of whether what's going on here is conflict preemption or field preemption.

Now, it depends on how one defines those terms.

But as we understand it it's conflict preemption, not field preemption, in the following sense.

Our position is not that State laws have no application to operating subsidiaries or to national banks for that matter.

It's that State laws apply to the same extent to operating subsidiaries as they would to national banks.

And as this court has made clear in the Atherton case and in the Barnett Bank case, State laws do apply to national banks and operating subsidiaries in a variety of respects, and State contract law would be an example.

But with operating subsidiaries in particular, State laws dealing with corporate governance questions, for example the process of incorporation, dissolution, shareholder voting, and things of that sort, would be controlling and so federal law doesn't control those sorts of aspects.

Chief Justice Roberts: It's field preemption when it comes to regulation.

Yes, if the bank is sued the normal rules of contract are going to apply for enforcing a contract.

But you're claiming field preemption with respect to regulation, correct?

Mr. Srinivasan: Well, I guess it depends on the degree to which the regulations apply to the national banks.

That's my only point, is that State laws apply to the same extent to the operating subsidiary as to the national bank.

Chief Justice Roberts: State laws generally... State agencies generally don't regulate national banks at all, right?

Mr. Srinivasan: State agencies don't generally do that because there's a specific statutory prohibition on that.

And Justice Scalia, this goes to your questions about the scope of these provisions at 12--

U.S.C. 484(a) and 481.

It's true that those provisions say by their terms that visitorial authority resides exclusively with the Comptroller of the Currency with respect to national banks, and there's another provision that deals with affiliates.

And so that's the point with visitorial authority.

But visitorial authority by its very nature is asserted in service of and enforcement of some underlying substantive requirement, and the underlying substantive requirement at issue here is the requirement that operating subsidiaries register with the State.

And so there's a question of conflict preemption that applies both to the national bank and the operating subsidiary of whether that underlying substantive registration requirement could be applied to the national bank or could be applied to the operating subsidiary.

Justice Stevens: Yes, but it is true, is it not, that as long as this mortgage company was a subsidiary of a holding company rather than the bank itself, the State would have done the visiting, the visitorial power, whereas once they changed the Federal Government assumed that responsibility?

Mr. Srinivasan: Well, I don't know what you mean by "holding company", Justice Stevens.

Justice Stevens: Well, as your co-counsel pointed out, previously this very company was a subsidiary of a holding company that also owned the bank, and at that time it was exclusively regulated by Michigan.

Mr. Srinivasan: That's right, because it wasn't an operating subsidiary of a federally chartered national bank.

Justice Stevens: And the change in the corporate structure is the sole basis for saying now it's exclusively regulated by the OCC?

Mr. Srinivasan: It is, but it's changing the corporate structure in a fundamentally important way.

That's that it's no owned and controlled by a federally chartered national bank.

Justice Stevens: But this results in field preemption to the extent that the exercise of visitorial power is a regulatory function?

Mr. Srinivasan: Well, again it depends on how one defines those terms.

And I don't take issue with the fact that as a consequence of the fact that this became a subsidiary--

Justice Stevens: Well, it is now only the Federal agency that does the visiting, whereas it used to be only the State agency?

Mr. Srinivasan: --That's right.

Justice Stevens: And the question that led me to is how many additional personnel did OOC employ when it took over this area for 48 States?

Mr. Srinivasan: Well, I don't have an empirical answer to that question.

Justice Stevens: But it was certainly quite a few people, I assume.

Mr. Srinivasan: But Justice Stevens, in the regulatory materials that attended the promulgation of these rules OCC specifically addressed the question whether it had sufficient resources to exercise oversight authority over operating subsidiaries of national banks.

And let's be clear.

It's not that the OCC previously had no authority over operating subsidiaries.

The question is whether the OCC has exclusive authority over operating subsidiaries.

And the OCC determined in the regulatory materials that it had sufficient resources to exercise oversight authority over operating subsidiaries--

Justice Stevens: But the authority under the old regime was just to make sure that the operation did not affect the financial stability of the parent bank.

Mr. Srinivasan: --But that's because it wasn't an operating subsidiary of a federally chartered national bank, and that changes things in a fundamental way for the following reason: That under the Barnett Bank case the rule of preemption, the special rule of preemption that applies in the context of national banking, is that when you're dealing with enumerated or incidental powers of national banks... and one incidental power of a national bank is undisputed to be the power to conduct affairs through an operating subsidiary... that the grants of those powers are normally preemptive of rather than preempted by State law.

And so once the operating--

Chief Justice Roberts: That was an effort of the State to prohibit the national bank from engaging in the activity, correct?

Mr. Srinivasan: --Well, that was.

But the Court--

Chief Justice Roberts: That's an obvious case of conflict preemption.

Here we have a question of whether or not the State can regular the operating subsidiary to any extent.

Mr. Srinivasan: --But the Court's decisions aren't limited to prohibitions of that sort.

I'd make two points in that regard.

First of all, in one sense this is a prohibition, because the operating subsidiary can't engage in federally authorized activities unless and until it gets the State's permission.

So at least there is a prohibition at the outset.

But more importantly, the Court's cases aren't limited to situations involving prohibitions of the sort that Your Honor posits, because in the Franklin National Bank case that was a situation in which the national bank had the power to accept savings deposits and the State law that was deemed to be preempted there didn't prohibit the national bank from accepting savings deposits.

Justice Scalia: What comes next?

Can the--

OCC say, well, the corporate law of this State doesn't really allow subsidiaries to do as much as we think a subsidiary of a national bank ought to be able to do, so we're going to attribute additional corporate powers to this subsidiary?

Can it do that?

Mr. Srinivasan: No, not if you're talking about corporate powers, because those are governed by State law.

What it could do, though, is regulate the subsidiary's conduct of the business of banking, because, after all, an operating subsidiary has one purpose and one purpose only, and that's to carry out functions that the national bank itself could perform.

Justice Scalia: What troubles me, and maybe you can answer to it more specifically than you have, is that the core function of a banking regulatory agency is the visitation power, and the Banking Act makes it very clear that there is visitation power to national banks and makes it very clear that there is not for subsidiaries.

And here is a regulation which under the guise, it seems to me, of defining the powers of the national bank simply eliminates that distinction.

And it seems to me that perhaps goes beyond what an agency regulation is allowed to do.

Mr. Srinivasan: With respect, Justice Scalia, I don't think the statutes say that at all.

There is a statute, 484(a), that says that the OCC's visitorial authority is exclusive with respect to national banks.

But there is no statute that says that the OCC's visitorial authority is not exclusive with respect to subsidiaries.

There's another statute that deals with affiliates.

Now one point is that affiliates are not limited to subsidiaries, but they could include for example, I guess brother and sister corporations for lack of a better term, that are controlled by a common parent.

But another point is that at the time these statutes were enacted, Congress simply didn't have within its field of vision the notion that a national bank would have the power to exercise its functions through a subsidiary corporation.

Chief Justice Roberts: Why should we assume that they wanted to preempt state laws to that extent.

Mr. Srinivasan: Because what Congress was trying to do is to make sure that the OCC had exclusive visitorial authority with respect to the conduct of national bank function.

It's just at the time that these statutes were enacted, the only play that national bank functions were being conducted was by a national bank itself.

Now later on, when the laws of all 50 states, the OTS, the Federal Reserve with respect to state member banks, and the comptroller gives banks the authority to conduct national... to conduct bank functions through its subsidiaries, then this issue arises about who exercises visitorial authority with respect to the conduct of those functions for a subsidiary.

And it stands to reason that if the baseline rule is that with respect to the conduct of national bank functions through a national bank itself, the OCC visitorial authority is exclusive, then when a national bank exercises its Federal entitlement to conduct those very same functions through an operating subsidiary, the OCC's visitorial authority, likewise, would be exclusive.

That seems to me to be an entirely reasonable regulatory determination by the comptroller, and there's nothing in those statutory provisions that speaks directly to that issue and that in any way precludes the comptroller from reaching that determination.

Justice Ginsburg: Practically, is there any difference between the way they operated when they were just a corporation as before, and now a parent and sub?

Mr. Srinivasan: Well, there could be.

I don't know about this particular case but there absolutely could be, Justice Ginsburg, because when they become subsidiaries they are controlled by the national bank and not by some other entity.

And the reason that a national bank would choose to engage in this sort of structure rather than folding the enterprise into the bank itself are many fold.

And in part it's for efficiency purposes because you can have focused management, especially when you're dealing with the sort of specialized things that operating subsidiaries typically do.

But there's also other reasons.

For example, there's a modularity component to this in the sense that the best specialized functions such as mortgage lending, very often a national bank will purchase an entity that conducts that activity, and may be interested in selling the entity later, and it's much more straightforward to do that if those functions are maintained in a separate subsidiary corporation.

Chief Justice Roberts: Is there any aspect of state law, including liability limitation, that they want to take advantage of by establishing a subsidiary chartered under state law, Michigan or another state, and yet they're claiming immunity from all other state regulations?

Mr. Srinivasan: Well, with respect to liability limitation in particular, Mr. Chief Justice, I should clarify that veil piercing principles and things of that sort would be governed by state law with respect to the operating subsidiary.

So if the question is whether the corporate veil is pierced, state law would dictate an answer to that question.

But, may I just finish one thought?

States won't have an incentive to liberally construe veil piercing principles with respect to national banks precisely because state member banks in all 50 states also have operating subsidiaries through which they charter banks to conduct banking functions.

Thank you.

Rebuttal of E. John Blanchard

Chief Justice Roberts: Thank you, counsel.

Mr. Blanchard, you have a minute remaining.

Mr. Blanchard: Two key points.

First, Section 484 and 481 have been amended subsequent to the time operating subsidiaries came into play.

Congress knew of operating subsidiaries when it amended 484 twice in the 1980s, and 481 was amended four times.

Yet, never did Congress insert the word OCC in 488.

Secondly, the Gramm-Leach-Bliley act is being greatly distorted.

The same terms and conditions language that my opponent referred to was meant to return op subs only to the authority that the parent bank could engage in.

It wasn't preemptive or meant to preempt the states.

The comptroller had issued a ruling, 34.F, (f), and they had allowed operating subsidiaries to do things differently from the parent bank.

Chief Justice Roberts: Thank you, Mr. Blanchard.

The case is submitted.

Print this transcript Transcript: 

Argument of Speaker

Mr. Speaker: Justice Ginsburg has the opinion this morning in case No. 05-1342, Watters versus Wachovia Bank.

Argument of Justice Ginsburg

Mr. Ginsburg: Business activities of national banks are controlled by the National Bank Act, the NBA and regulations adopted there under by the Office of the Comptroller of the Currency, OCC.

The NBA authorizes national banks to engage in real estate lending subject to OCC regulation under the Act only OCC not state regulators may oversee the bank’s conduct of its business and inspect the bank’s books and records.

The question in dispute does a national bank’s in mortgage lending remain outside the governance of state licensing and auditing agencies when the lending business is conducted not by the bank itself but by the bank’s operating subsidiary.

Operating subsidiary is a term used by OCC to describe “an entity authorized to do only business that the bank itself could do.”

In accord with the Court of Appeals that have considered this issue we hold that a national bank’s mortgage business whether conducted by the bank itself or through the bank’s operating subsidiary is subject to OCC’s superintendence and not to the licensing, reporting and visitorial regimes of the several States in which the subsidiary operate.

The case before us was initiated by Wachovia Bank an OCC chartered national bank and it’s wholly owned North Carolina chartered subsidiary, Wachovia Mortgage.

A company engaged in real estate lending in Michigan and elsewhere.

Under Michigan law banks, both national and state are exempt from state mortgage lending registration prescriptions but the exemption does not extend to the bank’s subsidiaries.

Michigan’s Office of Insurance and Financial Services notified Wachovia Mortgage that it could not engage in mortgage lending in the state unless it complied with Michigan’s registration requirements.

Wachovia Mortgage and its parent responded that their subsidiary is a subject exclusively to OCC’s licensing, ordering and surveillance regime.

To settle the dispute the Wachovia Company sued Michigan’s Commissioner Linda Watters for declaratory and injunctive relief prohibiting Watters from enforcing Michigan’s registration prescriptions against Wachovia Mortgage and from interfering with OCC’s exclusive visitorial authority.

The Federal District Court ruled for the Wachovia plaintiff, the Sixth Circuit affirmed and today we affirmed the Court of Appeals’ judgment.

Federally chartered banks are subject to state laws of general application in their daily business.

For example, state contract and property laws but when state prescriptions significantly impair the exercise of a national bank’s federally convert authority the State's regulations must give way.

Michigan’s commission acknowledges that the state could not subject a national bank to visitorial controls but argues that this State’s regulatory regime is not displaced with respect to national bank’s operating subsidiaries, we disagree.

Since 1966, OCC has recognized that national banks have incidental authority under the NBA to do their business through operating subsidiaries.

Just as duplicative state inspection and supervision would significantly burden mortgage lending by a national bank so to those same state controls would interfere with that same activity when conducted by a national bank’s operating subsidiary.

This court has never held that the NBA’s preemptive reach extends only to the national bank itself rather in determining whether state law hampers the federally permitted activities of a national bank the court has focused on the national bank’s powers not on whether those powers are exercised by the national bank itself or an operating subsidiary.

In some way the national bank engages in real estate lending through an operating subsidiary.

The subsidiary is subject only to the same terms and conditions as those that would govern the bank itself.

The state law in this case, North Carolina law, governs matter pertaining to an operating subsidiaries incorporation State regulators cannot interfere with the business of banking by subjecting national banks or their OCC licensed operating subsidiaries to rival oversight regimes.

We reject Commissioner Watters’s alternative argument based on the Tenth Amendment to the constitution because regulation of national bank operations is Congress’s prerogative under the Commerce and Necessary and Proper Clauses.

The Tenth Amendment holds no sway in this case.

Justice Stevens has field a dissenting opinion in which the Chief Justice and Justice Scalia joined.

Justice Thomas took no part in the consideration or decision of this case.